Cross-Border Workforce Management In India: The Role Of Employer Of Record Model

Author: Haritha Dhinakaran

Practice area: Labour and Employment  

India’s vast labour force, estimated atover 424 million individuals ^[1] with more than 65 percent under theage of 35,^[2] makes it a global hub for affordable and skilledtalent. However, India’s labour law landscape, considering its vastness, may bechallenging for foreign businesses that desire to hire locally without settingup a subsidiary. Navigating India’s central and state labour laws can becomplex for foreign businesses. In such a scenario, the Employer of Record (“EOR”)model, under which the EOR acts as the legal employer responsible for payroll,statutory contributions, and compliance with labour laws While the foreignentity retains operational control over the employees’ work without setting upa local subsidiary. This allows the foreign entity to navigate core business operationswhile the EOR handles labour compliances.

Key Challenges for Foreign Employers: Legal and Compliance Considerations

Foreign entities envisioning to hiretalent in India, either directly or through an EOR, will be required to follow alabyrinth of central as well as state labour laws. These laws cover wages,social security, working hours and employee welfare. The EOR serves as the legalemployer and will be responsible for ensuring compliance with labour laws,including payroll management, provident fund contributions, and requiredfilings.

That said, foreign employers doencounter several challenges while setting up EOR arrangements in India:

(i)          Companieswill have to use EOR services primarily in relation to project-based work. EOR arrangementsare suited for short-term or specific projects where the employees are notintegrated into the foreign company’s core operations. Indian courts haveconsistently held that the substance of the relationship matters more than itsform when identifying the real employer.^[3] If the foreign companyexercises direct supervision, control, or disciplinary authority, the EORarrangement will be viewed as a sham, making the foreign entity liable underIndian labour laws. To avoid this, the EOR or a designated local entity willhave to handle employment related documentation, performance management, and administrationof benefits.

(ii)        Atax consideration for foreign entities operating through an EOR model in Indiais the potential creation of a permanent establishment (“PE”) in India.Under India’s Double Taxation Avoidance Agreements (“DTAAs”) withcountries such as the United States, the United Kingdom, Singapore, theNetherlands, and Australia, a PE will exist if the foreign entity has a fixedplace of business or a dependent agent in India. If employees engaged throughan EOR perform core business functions for, or conclude contracts on behalf of,the foreign entity, such activities will lead to the creation of a PE andconsequent tax exposure in India. Similarly, under DTAAs with otherjurisdictions, the tests for determining a PE are based on factors such as thepresence of a fixed place of business, the duration of service activities, andthe authority of personnel to habitually conclude contracts.

(iii)       Further,foreign employers will have to address several operational challenges. Theseinclude navigating India’s state-specific labour laws, managing statutoryregistrations across jurisdictions, ensuring timely remittance of socialsecurity contributions, maintaining data privacy in cross-border employee datatransfers, and addressing termination compliances. Each of these areas requiresclose coordination between the EOR and the foreign company to ensure adherenceto Indian legal standards.

Cross-Jurisdictional Analysis: EOR in Global Markets

The EOR model is widely used acrossjurisdictions, though the legal frameworks differ.

(i)          Inthe Netherlands, legislation governing EORs (referred to as secondmentagreements) came into effect on January 1, 2020, under Article 7:692 of theDutch Civil Code^[4]. It outlines the EOR's responsibilities, such aspayroll and compliance. It also differentiates these arrangements fromtemporary agency work.

(ii)        Inthe United States, the EOR model is implemented through professional employerorganizations (“PEOs”) that manage compliance, payroll, and HR functionswhile the client company controls daily operations. However, the co-employmentstructure poses risks, particularly concerning workers’ compensation and statetax compliance. In Stephanie Perez v. Dermatology Group, PC v. ADP,^[5]both the company and its PEO were sued for discrimination, demonstrating theshared liability such arrangements can create.

(iii)       Inthe United Kingdom, umbrella companies serve as employers of independentcontractors, a practice linked to the IR35 legislation^[6] aimed atpreventing disguised employment. These companies handle labour and taxcompliances, ensuring that contractors meet the correct employmentclassification.

(iv)       InAustralia, the Labour Hire Licensing Act 2017^[7] regulates labourhire and EOR arrangements through strict licensing and compliance requirementsto prevent exploitation. In Branded Media Holdings Pty Ltd (inliquidation); In the matter of Brand New Media Pty Ltd.,^[8]the New South Wales court held that Brand New Media Group was the trueemployer, despite another entity being listed on documents, emphasising thatdocumentation cannot override the practical reality of the relationship. Thecourt found Brand New Media Group responsible as it performed essentialemployment functions, illustrating the importance of aligning legal form withactual operations.

Conclusion

Foreign entities may effectively hire inIndia, without establishing a subsidiary by using EOR models. When effectivelyset up, it minimizes administrative work and legal risk while permitting adherenceto regional labour and tax regulations. However, gaps in India’s regulatoryframework, need to be addressed to make the country an attractive destinationfor global employers.

References

[1] India’s workforce to increase to457.62 million by 2028: Report https://hr.economictimes.indiatimes.com/news/trends/indias-workforce-to-increase-to-457-62-mn-by-2028-report/115290476

[2] Is India’s rapidly growing youth populationa dividend or disaster? https://timesofindia.indiatimes.com/india/is-indias-rapidly-growing-youth-population-a-dividend-or-disaster/articleshow/97545222.cms

[3] Workmen of Nilgiri Coop. Mkt.Society Ltd. v. State of Tamil Nadu, (2004) 3 SCC 514, Hussainbhai v. AlathFactory Thezhilali Union, (1978) 4 SCC 257, Steel Authority of India Ltd. v.National Union Waterfront Workers, (2001) 7 SCC 1.

[4] Article 7:692 of the Dutch CivilCode - http://www.dutchcivillaw.com/legislation/dcctitle771010.htm

[5] https://images.law.com/contrib/content/uploads/documents/399/32091/Order-entered-re-ADP-MSJ-9.18.19.pdf

[6] Off-Payroll Working Rules -https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

[7] Labour Hire Licensing Act 2017 -https://www.legislation.qld.gov.au/view/html/inforce/current/act-2017-033

[8] [2020] NSWSC 557

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